The Economic Problem

• The 'Basic economic problem' is how to allocate scarce resources given unlimited wants
• Factors of Production:

  Capital - man made aids to production (NOT MONEY) e.g. machinery, factories, computers, etc

  Enterprise - People who produce goods and services to make profit

  Land - Natural land such as farmland or rainforests

  Labour - Human resources such as workers that produce goods and services
• Three fundamental choices to solve this problem:

  • What to produce - businesses decide based on consumer demand
  • How to produce - businesses decide based on what's most in demand
  • For whom to produce for - those who have enough income to afford certain goods and services in a market
• Opportunity cost: The cost of the next best alternative foregone when a choice is made